Destablising Inflation Concerns Weigh on the GBP

In March 2023, the United Kingdom's year-on-year consumer price inflation rate decreased to 10.1% from 10.4% in February. However, it exceeded the market forecast of 9.8%, and Britain remains the country in Western Europe with the highest rate of inflation. This also marks the seventh consecutive period where the rate has remained above 10% and has been above the Bank of England's 2% target for nearly two years.

Consequently, policymakers will have to consider raising borrowing costs more than previously expected. Deutsche Bank has increased their projections for UK rates by anticipating two additional 25 basis point rate hikes from the Bank of England. Meanwhile, Morgan Stanley forecasts a single rate hike, but there is a possibility of a second one.

British finance minister Jeremy Hunt said on Wednesday that "When inflation is above 10%, it is destabilising for the economy. It is not a good place to be, ultimately it is dangerous if you leave it there,".

The seesawing in the GBP in reaction to this inflation data drop has perfectly encapsulated these projections for more rate hikes and fears for a destabilised economy. Still, the GBP/USD has been able to fend off a position below 1.24000 and is currently testing the fortitude of 1.24352 as a support. Upside potential could be limited by resistance at 1.24494 and 1.24738 considering that the market has likely already priced in a 25-basis-points hike at the Bank of England’s next meeting on May 11.